Swaps-Group_1,_Section_A

Swaps-Group_1,_Section_A - annum on a notional principal of...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style 5/30/11 Swaps Presented By: Group 1, Section A
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
5/30/11 22 DERIVATI VES Financi al Commoditi es Basic Complex Forwards Swaps Futures Exotics/ Structured Products Options Warrants & Convertibles
Image of page 2
5/30/11 Investment in Derivatives Swaps : Swaps are financial contracts that obligate each of the two counterparties to exchange (swap) a series of cash flows in future. Swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties Two basic kinds of swaps are available : Interest rate swaps : Exchange of one set of interest payment, (eg: Fixed) for another set of interest payment (eg: Floating) based on some prefixed benchmark (LIBOR or MIBOR) all 33
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
5/30/11 Company A and Company B enter into a five-year swap with the following terms: Company A pays Company B an amount equal to 6% per annum on a notional principal of $20
Image of page 4
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: annum on a notional principal of $20 million. • Company B pays Company A an amount equal to LIBOR + 1% per annum on a notional principal of $20 million. • Therefore, Company A will pay Company B $20,000,000 * 6% = $1,200,000. Suppose the LIBOR rate is 5.33%; then, Company B will pay Company A $20,000,000 * (5.33% + 1%) = $1,266,000. 44 Interest Rate Swaps 5/30/11 Currency Swaps For example, Company C, a U.S. firm, and Company D, a European firm, enter into a five-year currency swap for $50 million. Let's assume the exchange rate at the time is $1.25 per euro .First, the firms will exchange principals. So, Company C pays $50 million, and Company D pays 40 million. This satisfies each company's need for funds denominated in another currency (which is the reason for the swap). 5/30/11 T H A N K Y O U...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern